Iceland tightens capital controls to prop up crown
Baku, March 16 (AZERTAC). Iceland tightened capital controls for creditors to its failed banks on Tuesday in a second bid in less than a week to boost the Icelandic crown after the currency`s slide this year has raised inflation fears in the import-dependent country. One of the main points of the parliamentary act passed on Tuesday, in a move which surprised markets, is to restrict the estates of the collapsed banks from paying their foreign creditors in foreign currency. Last week, the small North Atlantic island nation`s central bank unexpectedly sold 12 million euros in the interbank market in an attempt to brake the slide, its first market intervention in support of the crown since 2009. "This bill proposes that certain capital flows, which have been authorised to date, be limited," the government said in the bill. The government added that those flows could "create a serious instability in the currency market, which in turn could lead to a significant devaluation of the krona, sharply cut into the nation`s currency reserves, or both." The crown is still subject to capital controls after the collapse of Iceland`s main banks Kaupthing, Landsbanki and Glitnir in the 2008 financial crisis brought the economy and currency into a tailspin. The crown traded at 166.31 to the euro at 1749 GMT, nearly unchanged from Monday`s close, when it stood at 166.33 . Iceland hopes to slowly unwind the controls over the coming years as the economy recovers. But a recent slight loosening of the controls has resulted in unusually large outflows of foreign currency. "They are mainly eliminating exemptions to controls to the old banks, where the old banks were allowed to pay out foreign bond holders in foreign currency," Islandsbanki economist Jon Berke said. "We don`t know yet how the new rules will look. That might take a couple of weeks." Investment bank Islandsbanki said in a note to clients the tightening came as a surprise and represents a further steering of foreign currency outflows by the central bank. Parliament passed the bill with changes to the Act on Foreign Exchange early on Tuesday. The crown has in the past few days shed momentary gains made on last week`s central bank bid, to again trade about 5 percent lower to the euro than in early January. The crown volatility following the 2008 meltdown has prompted political talk of abandoning the crown in favour of another currency, such as the Canadian dollar. Iceland has already begun talks on joining the European Union, however, making it more likely it would to adopt the euro.
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